As the Life Sciences Industry Transforms, New Risks Emerge

The success of the mRNA COVID-19 vaccine helping to protect hundreds of millions of people—an extraordinary accomplishment in medical science—is expected to generate continuing private and public investments into life sciences companies and biotech startups.¹ In 2020 and 2021, approximately $148 billion in both private equity capital and funding from the National Institutes of Health flowed into life sciences companies.²

Not surprisingly, the life sciences industry, which is concentrated in the middle market, is growing. According to data from Chubb and the National Center for the Middle Market released earlier this year, answered by 52 life sciences companies across all industries, 35 % of these businesses added a new plant or facility in the previous 12 months and 50% of companies said it is extremely or very likely that they will add a new plant of facility in the next 12 months.

Other key findings include:

• While 15% of companies had made an acquisition in the prior 12 months, 52% said they’re extremely or very likely to acquire in the next 12 months.
• More than two-thirds (67%) of companies introduced a new product or service in the prior 12 months, and 66% said it is extremely or very likely they would introduce a new product or service in the next 12 months.
• Nearly two-thirds (63%) of companies say it is extremely or very likely they will expand into new domestic markets in the next 12 months.

As the industry expands, it is also transforming. The collaboration among life sciences companies, technology enterprises, universities, and other atypical partnerships to develop COVID tests, vaccines and treatments suggests more of the same ahead. Such collaborations are expected to continue in a spate of new partnerships, joint ventures, and licensing agreements, with an eye toward developing tomorrow’s pharmaceuticals, biomedical technologies, biotechnology-generated medicines, medical devices, and other products of benefit to humankind.

Many such products will be evaluated in the multi-phase clinical trials process. More than 1,300 decentralized clinical trials are likely to commence in 2022, representing a 28% increase from the number of clinical trials in 2021, and an eye-opening 93% increase from 2020.³

When change occurs at such a rapid pace and scale, new risks can emerge. Although the life sciences industry is one of the most highly regulated in the world, there is potential for significant and wide-ranging exposures.

The industry’s increasing reliance on contract manufacturing, its tiers of geographically diverse suppliers, new virtual collaborations with outside organizations, and the vulnerability of all companies’ IT systems and networks to highly sophisticated threat actors have crafted potentially perilous and at times unfamiliar risk landscape.

Existential business threats like natural disasters or cyberattacks can disrupt manufacturing and business-as-usual operations—sometimes for an extended period of time. If not well managed, mitigated and properly insured, these threats can result in significant financial losses and even reputational damage.

Supply Chain Concerns

As of mid-2022, the nearly two-year-old global supply chain crisis continued, exacerbated by stringent COVID lockdowns and geopolitical factors.⁴ Life sciences companies depend on a wide variety of imported active pharmaceutical ingredients (APIs), antibiotics, raw materials, critical components, diagnostic equipment, and medical devices and technologies.

China and India, which ended nationwide COVID lockdowns in May, together produce more than 80% of the world’s supply of APIs and 80% of antibiotics.⁵ During the worst of the pandemic, the flow of these critical supplies slowed dramatically, which has since eased only slightly.

Unable to import goods on a dependable basis from long-term suppliers, domestic life sciences companies may seek out alternative sources. A November 2020 survey of companies in diverse industries indicated that 57% were forced by supply chain disruptions to diversify and work with new suppliers.⁶

In making these decisions, companies must balance the opportunity against the risk of a supplier’s financial and management stability, working conditions and the manufactured purity of its materials and goods. The safety and efficacy of Chinese-made pharmaceuticals, for example, were under the microscope in 2018, when 250,000 substandard doses of a vaccine for diphtheria, tetanus and whooping cough were released in China,⁷ ten years after a raw ingredient imported from China to make the blood-thinning drug heparin was reportedly implicated in the deaths of 81 people in the U.S.⁸

Contract Manufacturing Exposures

Aside from supplier risks, life sciences companies confront other exposures in their agreements with global contract manufacturers. Key risks include a lack of control over the manufacturer’s product quality and working conditions, which may not meet the agreed upon regulatory standards. In situations where a middle market life sciences company has engaged with several contract manufacturers, management’s oversight of each of these entities may be deficient.

The Federal Drug Administration’s Center for Biologics Evaluation and Research requires life sciences companies to provide data on contract manufacturers and each of the suppliers in its supply chain. The FDA is known to make both scheduled and unscheduled inspections at these facilities. If supplies or manufactured products are determined to be inferior and unacceptable according to regulatory guidelines, the FDA can generate a broader investigation, which may result in government fines, protracted litigation, and reputational damage.

The CARES Act of 2020 gives the FDA additional clout to regulate the medical product supply chain. For example, the legislation requires reports on supply interruptions and discontinuances, as well as any limitations in the availability of supply chain data. The law was promulgated and implemented by the government to enhance its oversight of the industry, due to the lack of transparency in medical supply chains, according to a September 2020 report by the Congressional Research Service.⁹

Other common exposures for life sciences companies include third-party logistics (3PL) and order risks, given the need to import goods to the U.S. for final manufacturing and distribution, and the growing threat of a potentially disruptive cyberattack.

Cyber Exposures

Like all third-party partnering organizations with open access to company IT systems, the life sciences industry’s numerous partners, suppliers and contract manufacturers are at potential risk of a cyberattack. This risk, and the significant business disruption such an attack can cause, should be a key consideration.

According to a report authored by Chubb, Symantec and CoverHound, more than half of all cyberattacks are directed at midsized and smaller businesses. Yet, traditional property and casualty insurance policies may not respond to losses attributed to a cyberattack. Cyber insurance policies address many types of cyber exposures and provide insurance that can help absorb losses due to a lengthy business disruption and the repercussions of a cyberattack. Cyber policies may also provide contingent business interruption coverages that provide insurance when third-party businesses suffer a cyberattack that impacts a life science company.

Where Insurers Can Help

Certainly, it is incumbent that life sciences companies conduct adequate due diligence into these potential risks. Regular onsite audits of suppliers and contract manufacturers by the internal risk engineering organization can help pinpoint vulnerabilities and mitigate these exposures. External audit and advisory firms can also conduct these investigations, as can an insurance company specialized in serving the life sciences industry.

As part of the underwriting process, insurers can dispatch risk engineers trained in FDA protocols to inspect third-party manufacturing facilities and survey the risks of fire, flooding and water damage to property, equipment, and scientific research. The inspections are comprehensive, considering such factors as temperature and humidity controls to help reduce vivarium risks, the integrity of clean rooms to decrease the potential for contamination risks, and the security of IT networks and smart manufacturing systems in an Internet of Things (IoT) environment to help mitigate cyber exposures.

Experienced insurers can provide valuable consultative advice on network vulnerabilities, social engineering risks, data breach susceptibilities, 3PL and shipping exposures, and evolving regulatory, legal and cybersecurity standards, among other enterprise risk management (ERM) services.

As life science companies continue to grow and evolve to serve the interests of medical science, so too will the industry’s risk landscape continue to change. Prudent enterprise risk management and proper insurance coverage are needed to help ensure life sciences companies are able to maintain the pace of extraordinary innovation.

Lee Farrow is Executive Vice President and Life Sciences Industry Practice Leader at Chubb.

SOURCES:

1. BDO. 7 Predictions for the Life Sciences Industry. February 2022
2. Q1 2022 Life Sciences North American Update. Cushman & Wakefield.
3. GlobalData. 2022 forecast: decentralized trials to reach new heights with 28% jump. December 14, 2021.
4. Liberty Street Economics. New York Federal Reserve Bank of New York. Global Supply Chains Pressure Index. May 18, 2022.
5. Federal Drug Administration. Safeguarding Pharmaceutical Supply Chains in a Global Economy. October 29, 2019.
6. DNV. Companies pursue alternative suppliers to spread supply chain risks and build resilience. November 18, 2020.
7. New York Times. In China, Vaccine Scandal Infuriates Parents and Tests Government. July 23, 2018.
8. New York Times. U.S. Identifies Tainted Heparin in 11 Countries. April 22, 2008.
9. Congressional Research Service. FDA’s Role in the Medical product Supply Chain and Considerations During COVID-19. September 1, 2020.